American Giant: The problems of being an overnight success
After only eight months in business, everything at online fashion company American Giant was going according to plan last year.
The San Francisco-based business was enjoying "slow but steady growth", says founder Bayard Winthrop.
Come December and the company thought it was a little overstocked for the holiday season, but nothing was amiss.
Then American Giant got the type of positive publicity many companies can only dream off. Orders rocketed, and the firm was sent into emergency mode.
"Four days later we had nothing left," says Mr Winthrop. "We were down to the sticks in our warehouse."'Catastrophic success'
Three ways to grow a business
Whether a business brings in $10,000 a year or $10m, they can start to grow by using three simple strategies, says Terri Levine, a business mentoring expert.
- Increase prospects: Establish internally why customers should be turning to you instead of competitors. Then, make that message the core of advertising and marketing campaigns, and use it to dictate which customers you target.
- Increase conversion rate: Most small firms don't track the conversion rate from prospects to sales, but it can be worth investing in software that does. Once you know the real rate, you can better reach out to those who got away to determine your weaknesses.
- Increase customer worth: Look to increase sales by offering more or raising the value of your services. "Don't be afraid to raise prices," says Levine, who notes that even in this economy, businesses providing wanted services have been able to raise their rates by 10%.
Established in the spring of 2012, American Giant makes sweatshirts and other items of clothing, all produced in the US from American cotton.
Mr Winthrop envisioned a company where money saved from expensive retail operations - hiring salesclerks, covering rent etc - could instead be put into making better fitting, better crafted, more luxurious clothing.
Since it is an online-only retailer, customers cannot try on the clothing before buying. And reliant upon word-of-mouth marketing, Mr Winthrop estimated it would take two years for American Giant to really take off.
Then the online magazine Slate ran an article that named American Giant's hooded sweatshirt "the greatest hoodie ever made".
It triggered half a million dollars of new orders in less than two days, clearing out American Giant's inventory.
Two weeks before Christmas, the company was the victim of sudden success, without the manpower or the materials to meet demand.
"We talk about catastrophic failure. Catastrophic success is equally an issue," says Karl Stark, chief executive of Avondale, a strategic advisory firm that focuses on building and growing companies.'Great in theory'
The fact American Giant suddenly had such a problem on its hands was somewhat ironic, given that before starting the company, Mr Winthrop was an expert in scalability - the go-to guy when companies needed a way to grow their business to meet demand, but had hit a wall.
"They'd call me when they'd stall, as all small businesses do," says Mr Winthrop.
Most successful small businesses face a problem when they need to grow because they are overly dependent on one finite resource - for instance, the time and expertise of the lone baker who starts her own business.
She can satisfy 50, 100, even 500 customers - but as demand increases, it becomes impossible to grow supply. After all, the baker can only make so many cakes in a day.
"Any small business can grow to a certain level with the resources that it has," says Mr Stark. "But every business reaches the point where it's run the useful life of the current asset and needs to build a more scalable model."
While American Giant had scaling built into its business plan, it didn't anticipate having to do so in such a short time frame. As a result, it only took pre-orders on its most popular style, the zipped hooded sweatshirts, while being unable to restock the other styles of clothing, like T-shirts and sweatpants, that had also sold out.
On paper, Mr Winthrop had been doing everything right regarding plans to grow the business. In practice this can only go so far when unforeseen events occur.
"Inventory planning, your systems, your ability to scale... that's all great in theory," he says. "In reality, you're sitting there making a buy for a holiday season.
"We're planning for x, you make a bet on inventory for x. And you have a holiday season that is 50 times x, it's impossible to plan for that."'High-class problem'
Because American Giant's supply chain can be traced all the way back to the US cotton fields, with fabric being specially woven and dyed for it, getting a new shipment of raw materials wasn't as simple as making a phone call and waiting for an overnight delivery.
At the same time, the factory that was perfectly set up to make hundreds of sweatshirts was struggling to make thousands.
"That's a very high-class problem to have," says Alana Muller, president of Kauffman FastTrac, the non-profit institute designed to support entrepreneurs.
But it was still a problem. That's because businesses, especially growing businesses, do best when they can adjust as they grow - and that often requires time to reflect and plan.
"If you're growing slow and steady, there is a time to react to customer opportunities, there's time to test and learn, there's time to build the next generation of competitive advantage and strategic advantage to growth," says Mr Kraft.
Without that luxury, Mr Winthrop and his team were determined to stay the course, hoping that its customers would be patient as they waited for their orders.
The company has also moved forward as planned with a women's line, which will be launching this spring.
That's another part of Mr Winthrop's plan - to grow by doing more of what the company does well. "If we branch out into jeans, we're in trouble," he says.
Ms Muller agrees. "Companies have to stay true to their strengths and their customers," she says, noting clothing brands that specialise in sweatshirts can get in trouble by making, say, hats.
The new women's and expanding T-shirt lines planned by American Giant allow them to use the same fabrics and design concepts used in their sweatshirts. This creates both an economy of scale and allows previous satisfied customers an opportunity to keep buying.
And yet, American Giant, a company that hoped to win fans based on quality product and great customer service, still has had to deal with limited amounts of product and unhappy customers.
"This company may in fact make the world's best hoodie [I'll judge for myself if mine ever comes], but they obviously completely suck at scaling up to meet the demand created by this article," read one of the comments on the Slate story.
Mr Winthrop hopes that refusing to bend his standards to accommodate faster production will have long-term benefits.
"It's an acceptable thing for a customer to fall out of the queue for us and say, 'that wait was too long,' if the trade-off is that we maintain the standards that we're trying to make," he says.
"Commitment to quality comes first. And if that means customers have to wait an additional two weeks and they don't like that, we're going to ask our customers to be patient because we believe the quality and the pay-off is worth it."
The marketplace agrees. Mr Winthrop says last year American Giant came in 300% above forecasted growth, and it is forecasting growth of 500% in 2013.
So far, they're ahead of schedule.